A Nightmare For Governments
Discover more from The Blockchain Sector With James Bachini
A Nightmare For Governments
The Blockchain Sector 2023-04-25
Throughout history, governments have relied on centralization to maintain control over populations of people. Centralized control allows governments to adjust monetary policy to achieve their economic goals, such as controlling inflation & stimulating economic growth.
This isn’t always a bad thing, the Federal Reserve has pulled off a near impossible miracle in keeping the economy afloat during a period where almost every business shut down over Covid, in what could have been the worse recession in a hundred years.
Governments rely on the ability to print money, set interest rates, and regulate financial institutions to manipulate the economy in the desired direction. For example, with the current high level of inflation, the government can reduce the money supply and increase interest rates to bring inflation down.
This centralized control over the money supply also allows governments to fund their operations & policies. In more recent times the US government has weaponized the US dollars status as the global reserve currency through sanctions and freezing of assets.
Decentralized finance and digital assets challenge the traditional model of centralization, posing a potential threat to the government's ability to control the money supply
Decentralized finance (DeFi) refers to a financial system built on blockchain technology that operates without intermediaries like banks or financial institutions. Individuals can manage their own assets, transact with whoever they want and interact with permissionless financial applications.
In this system there is no central entity, the fiscal law is managed by code
Digital assets allow individuals to both transfer value and store value, without the need for banks or government approval. Cryptocurrencies offer the promise of security, decentralization and financial inclusion but at the cost of centralized control. No single entity has control over the network, funds can’t be frozen, transactions can not be reverted.
Downsides of DeFi
Government officials may, either now or in the future, view digital assets as a threat for several reasons.
Digital assets are difficult to regulate because they operate outside of the traditional financial system and the technology is very different to what the tradfi regulatory frameworks are designed for.
Governments cannot control the money supply of digital assets, which means they cannot influence monetary policy to influence economic activity.
Digital assets transactions, in their current form, are transparent which doesn’t make them ideal for illicit activities such as money laundering, but if this does occur the government has less power to prevent it.
The opportunity to transact peer to peer and potentially in the future with complete privacy raises questions about how to prevent tax evasion.
Banks & financial institutions play a big part in the economy and removing intermediaries would damage their business models
Governments thrive on the ability to print funds at will to finance their spending. Giving the public an alternative store of value would create a more competitive environment where inflation may have a more far reaching impact.
Perhaps this isn’t on the radar for the majority of politicians today. Their view of cryptocurrencies is probably formed by what they read in the press and financial journals.
I believe at some point in the future this will come to a head and there could be a fall out between communities that want decentralized finances and governments that want to cling on to their existing economic power.
Central Banks
Many central banks are in preparation for issuing their own digital currencies, known as central bank digital currencies (CBDCs). CBDCs would be owned, managed and backed by the central bank, which would allow governments to maintain control over the money supply. This is very different to the utopian vision for a decentralized global reserve currency and p2p settlement layer.
A government issuing a CBDC will likely use it to take more control and impose further authority over the monetary supply by launching on a private blockchain and including governance functions to freeze assets, revert transactions and monitor balances.
Governments can potentially enforce that all products and services are purchased with the native CBDC. It’s much harder to enforce that the native currency is used as a store of value, as we have seen in parts of South America.
The separation of state and finance is a dream for libertarians and a nightmare for governments around the world.
The ability to control populations through religion has faded over the last 100 years. What happens if nation states lose the ability to control the money?
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